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A poignant reminder

While in Washington DC last week, I visited the Franklin D. Roosevelt memorial - a beautiful, peaceful construction on the banks of the Potomac Tidal Basin.

This is one of the walls of the memorial. On it is a quotation that made me weep.

My grief was not for the Americans whose lives were wrecked by the terrible unemployment of the Great Depression, about whom FDR was speaking. No, it was for Europe. For the millions of Europeans whose lives are being devastated by the unemployment plague that is currently sweeping Europe. And for those in power in Europe, who do not share FDR's outrage at the ruin of lives and hopes, and who use weasel words such as "structural reform" and "internal adjustment" to blind themselves and others to the human tragedy of unemployment.

Adult unemployment in the Eurozone is currently over 11%. Even in the wider EU it is nearly 10%. Compare this with Japan and the USA:

These statistics are bad enough. But there is a wide spread between unemployment rates in EU countries, particularly but not exclusively in the Eurozone. We all know that Spain and Greece have adult unemployment rates over 20%, but how many people know that Croatia has an unemployment rate of 18.2%?

Such high adult unemployment is itself a tragic and appalling waste of human capital. But it pales into insignificance when compared to this:

This is a dry depiction of the destruction of the hopes and prospects of an entire generation. Eight years after the financial crisis, nearly a quarter of "economically active" young people (i.e. excluding those in education & training or unable to work for other reasons) in the EU are unemployed.

As with adult unemployment, the spread is wide. In some countries half of "economically active" young people are out of work. Even in the oh-so-successful UK, a fifth are unemployed.

UPDATE. Paul Bivand and Declan Gaffney point out that this is somewhat misleading, since the economically active youth population is falling because more young people stay on in education and training, which inflates the youth unemployment rate. Declan explains the effect for the UK in this post, and Paul provides Eurostat NEET figures as a proportion of total youth population. The effect of including economically inactive young people in the denominator varies considerably by country: for Greece and Spain it halves the unemployment rate, whereas for the UK it reduces it by only 8 percentage points. Obviously there could be many reasons for this, but the reduction appears to be larger in countries with higher unemployment rates, which suggests that young people in countries with high unemployment are more likely to stay on in education and training. NEET figures therefore contain an element of concealed unemployment.

Unemployment scars young people for life. We know that people who have periods of unemployment soon after leaving school or college never reach the earning power of those who do not. Youth unemployment in Europe is a human tragedy on a greater scale than America's Great Depression. It is wanton destruction of the social fabric of Europe. I could even describe it as a holocaust. Young people are being sacrificed across Europe to protect the wealth of a minority. It is an outrage.

FDR's message resonates down the decades, a poignant reminder that we have been here before:

No country, however rich, can afford the waste of its human resources. Demoralization due to vast unemployment is our greatest extravagance. Morally, it is the greatest menace to our social order.

This is an extravagance that Europe cannot afford. Unemployment, not debt, is the biggest issue facing the EU. If not addressed, it will blight not only the present, but the future too.

Comments

Powerful post, Frances, and a reminder of why every country needs a(n unconditional) basic income - to replace the current broken 'welfare system. Automation - not a bad thing - will only increase the numbers of the unemployed. (Can't write more now as plaster-cast on one arm...)

The idea that unemployment should be part and parcel of the system is only because of the closed ideology that values people's savings above all else. The idea that there is not enough money for full employment is only because not enough is printed by the government. Inflation is a product of more money for the same amount of production. If you increase production you get no inflation and everyone is better off. It is just ideology that stops us having full employment.

I have written a post on this subject actually - I really feel strongly here that we are hollowing out our economies. It is not technology that is taking jobs. It is lack of demand caused by too many savings.

The idea that simply bumping up demand solves the problem is a big over-simplification.

I agree that A SMALL AMOUNT of extra stimulus throughout the EZ would help. There’s obviously room for that given the very low inflation rate in the core, i.e. competitive countries. But that doesn’t solve the bulk of the problem in non-competitive periphery countries: i.e. a boost to demand that was big enough to solve the problem in the periphery (and that would be a HUGE INCREASE in demand) would cause excess inflation in the core.

The EZ and indeed the entire economics profession is at a loss for a solution, other than abandoning the Euro. So it’s time for way out possible solutions. Here’s one.

What about some form of accelerated internal devaluation. I.e. everyone in a non-competitive country agrees take a 20% or whatever pay cut. That would NOT, REPEAT NOT result in a 20% decline in living standards and for the simple reason that much of the cost of stuff consumed in a given country is the cost of labour in that country. But it WOULD MAKE the country more competitive, which solves the problem.

The big weakness in that solution is that employers probably wouldn’t reduce their profits by 20% or whatever, though market forces should ultimately cut their profits. So “accelerated internal devaluation” would only work in a country with a high degree of social cohesion and trust. I.e. it probably wouldn’t work in Greece.

But the above solution would be worth a try in perhaps just one country – if only to prove that the solution is impractical. And if it worked, hey presto: it could be implemented any time in the next thousand years in Europe, assuming human beings haven’t wrecked the planet by then.

Much the most “essential” product in any economy is food, and food is one of Greece’s main EXPORTS. So presumably it doesn’t need to import very much food.

I accept that it’s possible that the elasticity of supply and demand for any country’s exports and imports is poor and hence that devaluation (regular devaluation or internal devaluation) won’t work. Wynne Godley made that claim in respect of the UK many years ago.

However for any country in an “EZ periphery” situation, devaluation is the obvious first wheeze to try. And where countries have their own currencies, it’s the “automatic wheeze” that market forces put into effect.

If devaluation fails then (as Godley pointed out in the case of the UK), the only option is mass emigration. That has in practice been part of the solution for Greece for decades if not a century or more (as in the case of Ireland).

You guys love borrowing huge sums, wasting it, and then wiping out your savers/pensioners by devaluing the drachma. Truly an inspired approach to living for free, except of course, someone has to pay (those who save).

The Euro puts a nice stop to your approach yes? Will the Greek savers win the day this time, and force those who want to live for free to earn a living? Let's hope so!

Ralph, for most countries the most essential import is actually energy, not food. It is very hard to operate machinery, heat buIldings, run transport and maintain essential services without energy. For nearly all countries, energy comes in the form of fossil fuels. Fossil fuels are not easily substitutable: if the country has no natural reserves of oil and gas, it must import. Reducing domestic labour costs has no effect whatsoever on the cost of imported fossil fuels. All it does is create hardship for people and the domestic businesses who depend on them.

I refer you to my comments policy. You can find this on "About this blog", tab at the top of the page. I do not accept comments that are off topic or that personally attack me or anyone else on this site.

Your comment to Ari was both off topic and offensive. I must ask you to withdraw it. If you do not, then I will delete it.

Prior to joining the euro, Greece was self-sufficient in food and imported little. One of the really ridiculous effects of an overvalued exchange rate (the euro vs drachma) along with easier and cheaper access to credit was to fill supermarkets with imported fruit and vegetables, while domestic production collapsed. Moreover, the quality of the imported food was lower -- e.g. lemons from Turkey, very large and tasteless and rather dried up.

At the behest of the Troika, Greeks did suffer a massive "internal devaluation" of wages ann pensions (not to mention jobs lost). Since this was done simultaneously with imposing new massive taxes on property, collected via electricity bills with the threat of disconnection if you didnt pay up, along with new tax demands and hikes in VAT... the result was a great depression. This was always very clearly going to be the rresult, since the objective of the Troika was to force the Greek government to collect additional taxes and cut expendiiture. There was no intention of reforming the Greek economy, or assisting it to survive the fiscal crisis of the state while promoting private sector competition.

And that is where Greece remains to this day. Internal devaluation, or even conventional devaluation, has no meaning when an economy is in sustained depression. So-called reforms have no meaning either, in a hostile macroeconomic setting. This is the poverty of austerity economics, with Greece as the worst case but not alone.

You refer to Greece’s “overvalued exchange rate” that resulted from Greece joining the Euro, and the consequent influx of foodstuffs the Greeks had previously produced themselves. That supports my point that a big enough internal devaluation would solve the problem, surely?

@Ralph. Regarding your two replies. The second first: although in theory an "internal devaluation" might have helped, there were twin issues concerning this. The first is a theoretical and actual one: that an internal devaluation does not have the same effect as an exchange rate devaluation because it affects the domestic and external sectors equally. That has the result (if the int. dev. is large) of a massive reduction in demand followed immediately by deflation -- leading most certainly to a recessionary downward spiral.

Since Greece is the first victim of this idea of int. devn. one would have hoped that a strong theoretical analysis would inform the Troika. Far from it, they had no plan, and the IMF had very very poor models which contradicted the Greek models I was familiar with. The Greek models (from the state economics institute) predicted correctly the multiplier that the IMF got wrong, damaging the Greek economy very seriously.

So, an internal devaluation probably also needs a fiscal stimulus, to avoid depressed demand. That means more government spending, which was the exact opposite of what the Troika wanted.

And the answer to your first question is dependent on whether your priority is saving northern European banks or saving the Greek economy and the eurozone. The poiticians took appropriate action to save the banks and obviously had no interest in saving Greece. They pretend publicly the opposite, but the evidence contradicts their mealy-mouthed lies. On my part, I believe that banks should have been allowed to go bankrupt and the West should have rethought the role of banking in advanced capitalism. That is of course a risky approach, requiring real political vision and courage -- which they lack. Hence the mess we see now.

Re your first para, the exact extent to which internal devaluation would have a deflationary effect is not clear. E.g. one could argue that if wages are cut (as per my prescription) but prices and profits don’t fall pari passu then wage earners’ ability to buy stuff is reduced, ergo demand declines. On the other hand, that scenario automatically means that profits rise, and if entrepreneurs spend that extra profit, then the fall in demand could be less than might at first seem to be the case.

But that’s all irrelevant because the state can perfectly well make up for any fall in demand by implementing stimulus.

Re your second para, I agree that members of the Troika, and indeed economists in general are all over the place on this one. But then economists are all over the place on most issues!

Re your third para, you refer to the fact that the Troika demands deflation so as to bring about internal devaluation, and claim that that conflicts with the above stimulus. My answer to that is: “not under the “accelerated” internal devaluation system I’m proposing".

That is, the Troika’s form of internal devaluation consists of imposing deflation (high unemployment etc) for years on end in the hopes that that cuts wages and prices in periphery countries. So deflation and high unemployment is an inherent part of that system. By contrast, I’m saying: “why not just jump straight to the desired end result, i.e. reduced wages (and hopefully also profits)”. IN THEORY that could be done almost overnight with the result that years of deflation and high unemployment are not needed.

Re your final para, I don’t disagree with much there. You say, “On my part, I believe that banks should have been allowed to go bankrupt and the West should have rethought the role of banking in advanced capitalism.” The problem with letting lots of banks go under with the EXISTING BANK system is that chaos ensues (witness Lehmans), which is one of the main reason those banks were saved. A much better alternative (one which I think also deals with your desire to “rethink the role of banking”) is to simply bump up bank capital ratios to WAY ABOVE their present level. Personally I favour a 100% ratio as advocated by many of those who back full reserve banking. That way it’s plain impossible for banks to go insolvent.

If that system had been in place, the Euro authorities would have been able to stick two fingers up at the banks which loaned too much to Greece. The bank system WOULD NOT HAVE collapsed. Bank shareholders would have taken a big hit. Plus Greece would have got off more lightly. What’s not to like?

I’ve looked at numerous complicated economic issues over the last year or two. In half of those cases the game ends with full reserve banking holding the trump cards, as it does with this “Greek” argument.

@Ralph. I don't feel competent to enter into detailed discussions about banking, and certainly not on this blog! As far as my understanding of full reserve banking is concerned, it seems to me that it contradicts banking practices over the last century or longer, and severely limits the credit available to service a capitalist economy. It has the advantage of being completely safe, and the clear disadvantage of impeding economic development.

Concerning the internal devaluation idea. Well, i suppose it is probably true that if you pursue an expansionary fiscal policy then you can compensate for much of the depressed demand caused by the reduction of wages. However, this will not be sufficient to compensate for the reduced local wages -- which ceteris paribus would lead to long-term exodus (emigration) of skilled workers thus damaging the quality of the indigenous labour force. Increased unemployment seems almost inevitable to me, as it would be very difficult to engineer appropriate new jobs for those who had lost their jobs, particularly ones appropriate for skills and experience of the redundant workers. This again would damage labour quality.

The other major problem is that this is theoretical: the conditions under which governments would want such an internal devaluation are certainly going to be very serious macroeconomic conditions. In those conditions, without external financing (such as the EU), it seems unlikely that a government would be able to raise the money on international markets or to finance it from domestic sources.

Putting these two problems together, I stand by my original claim that an "internal devaluation" is no substitute for conventional exchange rate devaluation. The latter is an adjustment (preferably market driven) that compensates for things like continued unbalanced trade, along with uncompetitive production costs. It addresses the traded sector and has a positive effect on the non-traded sector provided that consumers alter their buying patterns in line with higher prices of imported goods (and that the domestic sector is able to produce such goods). This is not the case with the internal devaluation, which is far too crude a policy instrument.

Basically, when you join a monetary union you make a major structural commitment. This, the eurozone countries failed to realise. Pure amateurish economic management by politicians with no grasp of anything.

While the gist of the post is true, the employment statistics across countries are not directly comparable because of different methodologies. More specifically the unemployment rate in the US is equivalent to a much higher number in Europe. A quick search in wikipedia reveals this for example:http://en.wikipedia.org/wiki/Employment-to-population_ratiowhere a couple years ago employment was actually higher in Europe than in the US! Not sure of latest figures but I would guess that figures should be broadly similar.

Nonono. You can't use employment-to-population as a proxy for the unemployment rate without looking at the participation rate. The denominator of the unemployment rate is working population, not total population. Total population includes people who are not currently in the labour force. There can be significant differences between the unemployment rate and the employment-to-population rate because of changes in the participation rate.

Let me explain. If there were a wide difference in the participation rate, then for the same total population, a lower unemployment rate in the US and a higher rate in the EU might amount to the same number of people. If it did, then the employment-to-population rate would be the same. This is in effect what you are saying.

The US used to have a much higher participation rate than the EU. But that's no longer the case. The US's participation rate has crashed since the crisis and is now only 3 percentage points higher than the EU's rate. Therefore there simply cannot be that great a difference any more.

Let me give you an example with easy (though totally unrealistic) numbers. Let's assume that US and EU each have a working-age population of 1bn. US working-age participation rate is 90%, EU rate is 70%. So the US has 900m workers, the EU has 700m. If we have an unemployment rate of 10% in the EU, we have 70m people unemployed. The equivalent unemployment rate for the US, with its higher participation rate, is about 7.8%.

Now let's do the same calculation again with the actual participation rates, 63% for the US and 60% for the EU. As before, each has a population of 1bn, so the US has 630m workers and the EU 600m. 10% unemployment in the EU is 60m people. The equivalent for the US is an unemployment rate of just over 9.5%.

You may argue that the participation rate includes a lot of "hidden" unemployment. I would agree - indeed that was my response to Declan and Paul regarding youth unemployment. Falling participation rates inflate unemployment rates. But we would expect the US's unemployment RATE (not the number of people) to be overstated relative to the EU's, not understated as you suggest, since the US has suffered a larger fall in the participation rate. Yet the EU's unemployment rate is nearly twice that in the US, and the Eurozone's is even higher. Therefore if anything, the situation in Europe is even worse than the figures suggest.

The OECD gives standardized unemployment rates for almost all countries, anyway. It is not normally necessary to enter into this sort of debate, unless there is reason to think that there are serious new data deficits. The regular labour force surveys should pick up most of the major changes anyway, even if the official data are suspect.

The only real problem with comparative unemployment data is in comparing types of employment, e.g. when part-time employment is involuntary and an extensive phenomenon. Or when the informal sector is rather large, and total economic activity does not match lower known employment levels. No simple answers to those.

Fair enough, so the adjustment due to participation rate is approx. 0.5%. What puzzles me then is the big difference in the unemployment rate before the financial crisis. It's as if the "natural" unemployment rate is much higher in Europe permanently. What could explain that? Is it the informal sector of difference in treatment of part-time or seasonal employment?

Hmm. Prior to the crisis, the European countries with the highest unemployment rates were mostly those that structurally prioritised permanent full-time posts and discouraged part-time positions. Two of these countries (Italy and Greece) also had high informal activity.

But there are many other factors that account for different unemployment rates. One of them is the "natural rate" argument concerning economic structure. Another is something that has come up recently from CEDEFOP concerning overqualification of Europe's labour force, alongside skills mismatch. There are far too many graduates and those with postgraduate degrees who are looking for work compared with the jobs available. At the same time, there are unfilled specialised posts for which the employers need to recruit non-EU workers to fill them. The two mismatches are (according to models) expected to worsen significantly over the next decade, unemployment will rise while imported skilled labour will increase.

The UK and US especially engages its population in pointless employment to win purchasing power so as to absorb German and Chinese mercantile dumping......,...not a especially good policy , predicable yes but not good.

Employment ( call center jobs etc) is a method of social control rather then having a production objective.

Oh - my first comment was eaten.The radical liberal materialists of the FDR type are at the core of the problem.Their successful objective was to destroy more traditional and mostly non monetary family and village based cooperation.However management of this new type of atomized society is extremely complex and costly.To simplify this society every so often they engage in these big mobilization drives , this especially fills a spiritual void that simple consumption of Chinese products is unable to fill.

As the new millennium arrived, that was the situation. For as long as the power to buy and do of governments, corporations and consumers keeps increasing, and the teaching that this new western life is morally the best life ever, continues to have force for some, the West's post-European system will continue to function. It still has some years to go before it matches the life span of its more conservatively post-European Soviet counterpart. That the American system could last as long as that seems possible. That it can endure much longer is excluded by the extreme fragility of its life-support mechanism.Inevitably, within a matter of years, there will be an end to the continuous increase of the power to buy and do, and with that the main source of the system's ersatz sense and social glue will vanish. Ipso facto, its vaunted moral superiority will become an irrelevant twaddle. Nothing will then remain to prevent the direct and continuous impact of its senselessness and effective normlessness on the consciousness of westerners, nor to make the system's senseless and unloved life framework seem a good life. Bereft of its life-support mechanism, it will turn sufferers into opportunists whom the ever-growing number of regulations, and the ever-better-equipped police forces, will fail to tame. Like a creeping earthquake, first here then there, the chaos of the utopian values and rules will translate into a violent social disintegration which long-foretold ecological disorder will exacerbate. The only effective remedy will be the eventual slow emergence of a new civilisation—providing, as do all civilisations, sense and internalised norms, and relegating Europe’s, after Rome’s, to history.To repeat: The fatal defect of this post-European venture has been its ignoring of the enduring needs of human beings with regard to the system of rules-to-live-by that governs their life together. Pointless, given that neglect, that in its pursuit of justice, freedom and power, and the perfecting of those practical arrangements that serve human material needs and longevity—it reached towards the sky. The sky is not a human habitat."Desmond Fennell

PS - currently playing host to Canadians who are unable to walk from to BIf fit -Exercise for them is yet another consumption good or service rather then a aspect of life you incorporate into your immediate surroundings , television shows express the need to get fit while also advertising cars to take the kids to school.

This is the modern world trap that these liberal materialists have moulded for us - and you expect me to be grateful to these guys !!!!!!!!!!

You know, life is harsh, no one is guaranteed anything, much as the leftists would like that to be the case. Just look at the less-developed world.

The only issue is whether the leftists can obtain power to grab as much as they can from the productive to pass to the unproductive. In the middle, always, a leeching government (and banks) or varying colours and size, but always leeching for its own purposes.

One day humankind may awaken to the realities, but for the rest of your days Frances, nothing but misery awaits, as the mistakes of the 20s and 30s have already been repeated again, but to a whole new level of absurdity.

Your prescription above was more printing, borrowing and spending. More of what went wrong in the 30s.Classic view-of-the-times, QE doesn't work, deficits are too small, we MUST DO MORE. Kill the savers, the selfish savers, they must be robbed to pay for the debtors!Yes, we will do more, so do not worry, your wish will come true (although not in Greece or the EZ, the Euro concept will thankfully hamstring you, and I don't see the feckless winning a referendum against the savers). Tough luck eh! Perhaps go and live in Argentina or Venezuela, where you will find Utopia awaits you.

Today's misery will be like a party in 10 year's though, mark my words. And wait til the 2030s.

If “big government” is an important part of the problem, how come there are many countries round the world which have as “big a government” as Greece, but don’t have Greece’s problems? Scandinavian countries spring to mind.

But we do need massive investment in productive assets such as decent, affordable housing for all and the transition to a low carbon economy (which makes more & more sense the higher carbon fuel prices get). We also need spending on productive people to care for us, educate us, keep us secure and so on.

No government which is a sovereign currency issuer can ever run out of money. There is no reason whatever why a government should not fund such investment simply by creating and spending the necessary Treasury credit (aka modern money) into existence. This happens routinely in wartime, and of course continues on a massive scale to fund increasingly baroque weaponry and a completely useless nuclear deterrent.

Having spent money into existence, the Treasury may avoid inflation either by taxing and retiring excess money or by mopping it up with savings instruments (eg War Loan in war time) to the extent that the private sector cannot attract savings. It is a misconception that the government stock which is issued to fund expenditure after the fact is debt - it is in reality dated credit not a million miles away from Preference Shares in UK Incorporated.

But I digress. The point is that provided expenditure on productive people (and that does not necessarily mean productive of profit) and productive assets is professionally managed (and yes, government doesn't always get that right) there is no reason at all why the Treasury should not fund this expenditure either through direct expenditure or through the fiscal agency of its Central Bank.

When you've learnt how a modern economy works in practice then you will be qualified to criticise Frances, but will in fact not feel the need. Until then, you're doing yourself no favours by displaying your ignorance in this forum.

Chris, I understand MMT perfectly well thank you, so spare me the sanctimonious lectures. You guys forget that MMT is flawed in a global economy, and once demand for one's money vanishes, your little game is up. Watch out!

You folk are all the same, you think government is basically a force for good. You believe creating money from thin air for government to spend on *investment* is a good thing.

I believe you're all wrong, government rarely spends well, as the past shows, and the future will prove it again.

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